The Financial Conduct Authority (“FCA”) has issued its final guidance (and accompanying feedback statement) for insurance and premium finance firms on the fair treatment of customers in temporary financial difficulty as a result of coronavirus. The guidance will come into force on 18th May 2020 and will be reviewed in three months and revised if appropriate. Customers should be able to request a payment deferral until 18 August 2020.
There have been a small number of amendments to the draft guidance we discussed in our earlier article. These include:
- Clarifying how the guidance applies to different types of customer and insurance contract
- The sections of the guidance relating to premium finance credit agreements only apply for retail customers and do not extend to lending for business purposes. This is the case even when the lending for business purposes is within scope of the regulated credit regime, such as non-exempt lending to a sole trader. However, the FCA points out that the Principles apply to all business customers within the scope of the consumer credit regime and firms might therefore find the premium finance sections of the guidance helpful when considering how to comply with the Principles in relation to businesses.
- The insurance elements of the guidance are relevant to customers who fall within the scope of being ‘eligible complainants’ under DISP 2.7.3R. This includes natural persons and small business customers.
- The guidance applies to non-investment insurance contracts, which include both general insurance and pure protection contracts. It does not cover investment-based insurance contracts or reinsurance. However, firms providing these products should consider what is required when dealing with customers who are in financial difficulties and might like to provide support to customers in line with the guidance.
- The FCA has amended the guidance to make clearer how it expects firms to act to support customers of pure protection contracts. Firms should consider carefully whether it is in the customer’s interests to cancel cover even where a payment deferral is in place as a result of temporary difficulties from coronavirus. Firms will need to identify how they are able to deliver fair outcomes for affected customers and whether it is better to provide customers with a temporary limitation or suspension of cover when considering what options are available for the customer. The FCA urges firms to prioritise that customers have appropriate insurance in place.
- Providing clarity that firms do not have to consider an interest rate revision as a prerequisite to offering a payment deferral
- Firms do not have to consider an interest rate revision as a prerequisite to offering a payment deferral or other forbearance option and the guidance has been amended to reflect this.
- However, customers in temporary payment difficulties may still benefit from an interest rate reduction where possible, following an interest rate revision. So, the guidance still sets out the expectation that firms consider reviewing interest rates to ascertain whether they are treating customers fairly in light of the current exceptional circumstances. But this should be done as part of a holistic assessment, not mandated as sequential steps.
- Providing flexibility for firms to offer a payment deferral period of between 1 and 3 months
- The exceptional nature of the current situation means firms should provide support at the first signs of financial difficulty and should make it easy for customers to access support when they ask for it. For that reason, when a customer wants to receive a payment deferral, a firm should grant this unless the firm determines (acting reasonably) that it is obviously not in the customer’s interests to do so.
- There is no expectation under the guidance that the firm makes enquiries with each customer to determine the circumstances surrounding a request for a payment deferral, or whether this is not in the customer’s interests. However, the guidance does provide flexibility in determining the payment deferral period of between 1 and 3 months (or longer should a firm so choose) that is appropriate. Firms can consider the payment deferral period that is in customers’ interests at a book/cohort level, rather than having individual conversations with customers about their circumstances.
- Factors that a firm may want to consider in determining the payment deferral period include:
- the remaining term of the credit agreement;
- the customer’s ability to repay the accrued debt within the remaining term once the payment deferral period ends;
- whether it may be possible for the customer to get an extension to the insurance policy and credit agreement; and
- the impact of the payment deferral period on the customer’s ability to get credit to pay for an insurance policy in instalments in the following year.
- For these reasons, it is possible that longer payment deferrals may not always be in the interest of customers. This may leave them with a significant debt built up, at a point in time where they will shortly need to renew their insurance policy. So the FCA guidance sets the expectation that firms consider a range of measures, not just payment deferrals, that may help customers in temporary financial difficulty. It also includes flexibility on the length of any payment deferral.
- Where customers cannot afford to resume payments at the end of the payment deferral period, firms should work with them to attempt to resolve these difficulties before payments are missed. This should help to reduce the likelihood of customers becoming over-indebted. The firm should treat the customer with forbearance and due consideration as is required by the rules in the Consumer Credit Sourcebook (CONC). For all matters relating to the end of a payment deferral period, firms should have regard to their obligations under Principle 6.
- Where customers can resume repayments at the end of the payment deferral period, firms have flexibility about resuming repayments, depending on a customer’s circumstances. There will be some customers who can afford to make one lump sum payment for the deferred repayments at the end of the deferral period. There will be others for whom it would be best to reschedule the repayments across the remaining term or agree a repayment plan. There will also be some customers for whom extending both the credit agreement and the underlying insurance policy might be a preferable option, if possible. These are just examples given by the FCA and it is open to firms to reach a solution that is in the customer’s interests.
- The FCA recognises that payment deferrals may not be in the interest of all customers. Where a payment deferral is obviously not in customers’ interests, firms should without unreasonable delay offer other ways to help those customers. For example, by offering reduced payments, a rescheduled term or waiving all late payment fees and charges. The guidance does not prevent firms from offering more favourable options, including writing off unpaid premiums and related fees and charges.
- Where a customer was already experiencing payment difficulties unrelated to coronavirus, existing forbearance rules and guidance in CONC would continue to apply. This could involve granting a payment deferral if appropriate in the circumstances.
- Where a firm has granted a payment deferral before the guidance came into force, it will be for firms to determine whether a further payment deferral is appropriate for the customer once the guidance is in force. Firms should consider whether a payment deferral, which is intended to provide temporary relief, would be appropriate for a customer who may be facing longer term payment difficulties.
- Clarifying that firms do not need to proactively contact customers considered vulnerable
- Some industry respondents were concerned that an undue burden would be placed on them given the suggestion that a firm should actively contact those customers it considers vulnerable. The guidance has been amended to clarify that the FCA is primarily concerned that firms provide support to customers who contact them with issues or customers who have missed payments since the Government introduced the lockdown period. This should ensure that those that are in greatest need of support or forbearance can access it while enabling firms to take a proportionate approach in response to coronavirus. The FCA says it does not consider it appropriate for firms to make changes to a customer’s account or undertake forbearance measures where the firm has not had a dialogue with that customer.
The FCA notes firms’ concerns around customers failing to make up payments for time on risk which has elapsed without a claim event, and that this could increase the default rate at some cost to firms. However, it has concluded that this should not be an impediment to offering payment deferrals and other measures, and that firms should consider the customer’s best interests.
The FCA has not amended the criteria on what constitutes a customer suffering temporary financial difficulty, seeking to avoid being too prescriptive, and allowing firms to use their own criteria. The FCA suggests that firms provide support at the first signs of financial difficulty and make it easy for customers to access support when they ask for it. Firms should make clear that support is available, for example, through advertising on websites. Where there are multiple firms involved in the provision of insurance arrangements, firms should work together across the distribution chain to ensure customers are treated fairly and given the support they need.
The FCA has acknowledged the operational challenges in the implementation of the guidance but hopes that the flexibility and non-prescriptive nature of the guidance will enable firms to provide appropriate support to customers facing temporary financial difficulties, in line with respective business models, systems and infrastructure.
Many firms asked questions about the interaction of the guidance and Consumer Credit Act obligations. The FCA refers readers to FS20/3 where it says the issues are discussed in detail. In the FCA’s view, appropriate processes could be put in place which would either not trigger certain CCA requirements or could operate alongside them (for example by issuing accompanying information alongside a NOSIA).